Item 2.  Management’s Discussion and Analysis of Financial Condition and Results of Operations.

The following discussion is intended to assist in understanding our results of operations and our financial condition. This section should be read in conjunction with management’s discussion and analysis contained in our Annual Report on Form 10-K for the year ended December 31, 2018, filed with the Securities and Exchange Commission (“SEC”) on March 18, 2019.  Our consolidated financial statements and the accompanying notes included elsewhere in this report contain additional information that should be referred to when reviewing this material. Certain statements in this discussion may be forward-looking. These forward-looking statements involve risks and uncertainties, which could cause actual results to differ from those expressed in this report.  A glossary containing the meaning of the oil and gas industry terms used in this management’s discussion and analysis follows the “Results of Operations” table in this Item 2.

Cautionary Statement Regarding Forward-Looking Statements

Various statements in this report, including those that express a belief, expectation or intention, as well as those that are not statements of historical fact, are forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). The forward-looking statements may include projections and estimates concerning the timing and success of specific projects, typical well economics and our future reserves, production, revenues, costs, income, capital spending, 3-D seismic operations, interpretation and results and obtaining permits and regulatory approvals. When used in this report, the words “will,” “believe,” “intend,” “expect,” “may,” “should,” “anticipate,” “could,” “estimate,” “plan,” “predict,” “project,” “potential” or their negatives, other similar expressions or the statements that include those words, are intended to identify forward-looking statements, although not all forward-looking statements contain such identifying words.

These forward-looking statements are largely based on our expectations, which reflect estimates and assumptions made by our management. These estimates and assumptions reflect our best judgment based on currently known market conditions and other factors. Although we believe such estimates and assumptions to be reasonable, they are inherently uncertain and involve a number of risks and uncertainties that are beyond our control. In addition, management’s assumptions about future events may prove to be inaccurate.  We caution all readers that the forward-looking statements contained in this report are not guarantees of future performance, and we cannot assure any reader that such statements will be realized or the forward-looking events and circumstances will occur.  Actual results may differ materially from those anticipated or implied in the forward-looking statements due to the factors listed or referred to in the “Risk Factors” section and elsewhere in this report.  All forward-looking statements speak only as of the date of this report. We disclaim any obligation to publicly update or revise any forward-looking statements as a result of new information, future events or otherwise, unless required by law. These cautionary statements qualify all forward-looking statements attributable to us, or persons acting on our behalf. The risks, contingencies and uncertainties relate to, among other matters, the following:

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Overview

Approach Resources Inc. is an independent energy company focused on the exploration, development, production and acquisition of unconventional oil and gas reserves in the Midland Basin of the greater Permian Basin in West Texas, where we leased approximately 150,000 net acres as of March 31, 2019.  We believe our concentrated acreage position and extensive, integrated field infrastructure system provides us an opportunity to achieve cost, operating and recovery efficiencies in the development of our drilling inventory.   Our long-term business strategy is to create value by growing reserves and production in a cost efficient manner and at attractive rates of return.  We intend to pursue that strategy by developing resource potential from the Wolfcamp shale oil formation and pursuing acquisitions that meet our strategic and financial objectives. Additional drilling targets could include the Clearfork, Canyon Sands, Strawn and Ellenburger zones.  We sometimes refer to our development project in the Permian Basin as “Project Pangea,” which includes “Pangea West.”  Our management and technical team have a proven track record of finding and developing reserves through advanced drilling and completion techniques. As the operator of all of our estimated proved reserves and production, we have a high degree of control over capital expenditures and other operating matters.

At December 31, 2018, our estimated proved reserves were 180.1 million barrels of oil equivalent (“MMBoe”), made up of 29% oil, 31% NGLs and 40% gas. The proved developed reserves were 37% of our total proved reserves at December 31, 2018.  Substantially all of our proved reserves are located in the Permian Basin in Crockett and Schleicher counties, Texas.  At March 31, 2019, we owned working interests in 814 producing oil and gas wells.

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Going Concern Uncertainty

Our liquidity and ability to comply with debt covenants under our revolving credit facility have been negatively impacted by the recent decrease in commodity prices, the severe natural gas price discount in the Permian Basin and restructuring expenses incurred during the three months ended March 31, 2019. Our revolving credit facility contains three principal financial covenants: (i) a consolidated interest coverage ratio, (ii) a consolidated modified current ratio and (iii) a consolidated total leverage ratio. See Note 5 to our consolidated financial statements in this report for additional information regarding the financial covenants under our revolving credit facility. As of March 31, 2019, we were not in compliance with the consolidated interest coverage ratio and the consolidated total leverage ratio covenants under our revolving credit facility, which represents an event of default under our revolving credit facility. As a result, we have classified the outstanding balance on our revolving credit facility as a current liability as of March 31, 2019. These factors raise substantial doubt regarding our ability to continue as a going concern.

In order to improve our leverage position, we are currently pursuing or considering a number of actions, which in certain cases may require the consent of current lenders, stockholders or bond holders. As part of our review of deleveraging transactions, we are currently engaged in discussions with Wilks Brothers, LLC, and its affiliate SDW Investments, LLC (collectively, “Wilks”) regarding their investment in the Company, including, without limitation, a possible debt for equity exchange of approximately $60 million of 7% Senior Notes due 2021 (the “Senior Notes”) currently held by Wilks and an additional capital infusion into Approach (the “Exchange Transaction”). There can be no assurance that these discussions will result in the consummation of any transaction in a timely matter, if at all.

We have also reached an agreement with our credit facility lenders to forgo enforcement of remedies for an event of default caused by our failure to comply with certain financial covenants in the credit facility for a period of 45 days. This agreement will terminate on June 22, 2019, unless earlier terminated due to additional events of default under our credit facility, or a default under the agreement. See Item 5. “Other Information – Entry into a Material Definitive Agreement” for additional information regarding the terms of the agreement. In addition, we are in continuing discussions with the lenders regarding a potential extension of and amendments to the existing credit agreement. There can be no assurance that these discussions will result in the consummation of any extension or amendment in a timely matter, if at all.

As we have previously disclosed, our Board has formed a committee of independent directors (the “Committee”) to evaluate the Exchange Transaction as well as other financing alternatives and deleveraging transactions, including without limitation (i) amendments or waivers to the covenants or other provisions of our revolving credit facility, (ii) raising new capital in private or public markets and (iii) restructuring our balance sheet either through an in court Chapter 11 proceeding or through an out of court agreement with creditors. We are also considering operational matters such as adjusting our capital budget and improving cash flows from operations by continuing to reduce costs, and intend to continue to evaluate other strategic alternatives, including: (i) acquiring assets with existing production and cash flows by issuing preferred and common equity to finance such acquisitions; (ii) selling existing producing or midstream assets; and (iii) merging with a strategic partner. There can be no assurance that any of these discussions will result in the consummation of any transaction in a timely matter, if at all, or that such plans, if implemented, would result in regaining compliance under our credit facility.

First Quarter 2019 Activity

During the three months ended March 31, 2019, we produced 906 MBoe, or 10.1 MBoe/d. At March 31, 2019, we had seven horizontal Wolfcamp wells waiting on completion. We currently have no rigs running in Project Pangea.

2019 Capital Expenditures

For the three months ended March 31, 2019, our capital expenditures totaled $0.4 million, primarily related to infrastructure projects and equipment. We initially set our 2019 capital budget at a range of $30 million to $60 million. We are currently evaluating our annual capital budget, and our capital expenditures for 2019 will depend on the results of the potential deleveraging transactions disclosed above.

Our 2019 capital budget excludes acquisitions and lease extensions and renewals and is subject to change depending upon a number of factors, including prevailing and anticipated prices for oil, NGLs and gas, results of horizontal drilling and completions, economic and industry conditions at the time of drilling, the availability of sufficient capital resources for drilling prospects, our financial results and the availability of lease extensions and renewals on reasonable terms. Although the impact of changes in these collective factors in the current commodity price environment is difficult to estimate, we currently expect to execute our development plan based on current conditions. To the extent there is a significant increase or decrease in commodity prices in the future, we will assess the impact on our development plan at that time, and we may respond to such changes by altering our capital budget or our development plan.

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Results of Operations

The following table sets forth summary information regarding oil, NGLs and gas revenues, production, average product prices and average production costs and expenses for the three months ended March 31, 2019 and 2018.  We determine a barrel of oil equivalent using the ratio of six Mcf of natural gas to one Boe, and one barrel of NGLs to one Boe. The ratios of six Mcf of natural gas to one Boe and one barrel of NGLs to one Boe do not assume price equivalency and, given price differentials, the price for a Boe for natural gas or NGLs may differ significantly from the price for a barrel of oil.

Glossary

Bbl.   One stock tank barrel, of 42 U.S. gallons liquid volume, used herein to reference oil, condensate or NGLs.

Boe.   Barrel of oil equivalent, determined using the ratio of six Mcf of natural gas to one Bbl of oil equivalent, and one Bbl of NGLs to one Bbl of oil equivalent.

MBbl.   Thousand barrels of oil, condensate or NGLs.

MBoe.   Thousand barrels of oil equivalent.

Mcf.   Thousand cubic feet of natural gas.

MMBoe.   Million barrels of oil equivalent.

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MMBtu. Million British thermal units.

MMcf.   Million cubic feet of natural gas.

NGLs.   Natural gas liquids.

NYMEX. New York Mercantile Exchange.

/d.   “Per day” when used with volumetric units or dollars.

Three Months Ended March 31, 2019 Compared to Three Months Ended March 31, 2018

Oil, NGLs and gas sales .  Oil, NGLs and gas sales decreased $9.6 million, or 33%, for the three months ended March 31, 2019, to $19.2 million, compared to $28.8 million for the three months ended March 31, 2018.  The decrease in oil, NGLs and gas sales was due to a decrease in average realized commodity prices ($6.4 million) and a decrease in production volumes ($3.2 million).  Production volumes decreased as a result of no well completions in the fourth quarter of 2018 or first quarter of 2019. We expect oil, NGLs and gas sales to decrease in 2019 compared to 2018 due to a decrease in commodity prices and a decrease in production due to decreased well completion activity.

Net loss .  Net loss for the three months ended March 31, 2019, was $16.8 million, or $0.18 per diluted share, compared to $7.4 million, or $0.08 per diluted share, for the three months ended March 31, 2018. Net loss for the three months ended March 31, 2019, included restructuring expenses of $6.3 million and a commodity derivative loss of $2.8 million. The increase in the net loss for the three months ended March 31, 2019, was primarily due to the restructuring expenses ($6.3 million) and a decrease in revenue ($9.6 million), partially offset by a decrease in other operating expenses ($5.6 million).

Oil, NGLs and gas production.   Production for the three months ended March 31, 2019, totaled 906 MBoe (10.1 MBoe/d), compared to production of 1,020 MBoe (11.3 MBoe/d) in the prior-year period, an 11% decrease.  Production for the three months ended March 31, 2019, was 24% oil, 36% NGLs and 40% gas compared to 27% oil, 34% NGLs and 39% gas for the three months ended March 31, 2018.  Production volumes decreased during the three months ended March 31, 2019, as a result of no well completions in the fourth quarter of 2018 and first quarter of 2019. We expect production to decrease from current levels due to decreased well completion activity.

Commodity derivative loss.    The following table sets forth the components of our commodity derivative loss for the three months ended March 31, 2019, and 2018 (dollars in thousands).

Commodity derivative settlements are derived from the relative movement of commodity prices in relation to the fixed notional pricing in our derivative contracts for the respective years. As commodity prices increase or decrease, the fair value of the open portion of those positions decreases or increases, respectively. We record our open derivative instruments at fair value on our consolidated balance sheets as either derivative assets or liabilities. For commodity derivatives not designated as a cash-flow hedge, we record changes in such fair value in earnings on our consolidated statements of operations under the caption entitled “commodity derivative loss.” As of March 31, 2019, we had no outstanding commodity derivative contracts designated as cash-flow hedges.

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Lease operating. Our lease operating expenses (“LOE”) de creased $ 0.4 million, or 8 %, for the three months ended March 31, 2019 , to $ 4.9 million, or $ 5.38 per Boe, compared to $ 5.3 million, or $ 5.16 per Boe, for the three months ended March 31, 2018 .  The in crease in LOE per Boe for the three months ended March 31, 2019 , was primarily du e to lower production volumes . The following table summarizes LOE per Boe.

Production and ad valorem taxes. Our production and ad valorem taxes decreased $0.6 million, or 23%, for the three months ended March 31, 2019, to $1.9 million compared to $2.5 million for the three months ended March 31, 2018.  Production and ad valorem taxes were $2.13 per Boe and $2.45 per Boe and approximately 10.1% and 8.7% of oil, NGLs and gas sales for the three months ended March 31, 2019 and 2018, respectively. The decrease in production and ad valorem taxes was primarily a function of the decrease in oil, NGLs and gas sales between the two periods.  

Exploration. We recorded exploration expense of $9,000 for the three months ended March 31, 2019, compared to no exploration expense for the three months ended March 31, 2018.

General and administrative . Our general and administrative expenses (“G&A”) decreased $2.8 million, or 43%, to $3.8 million, or $4.15 per Boe, for the three months ended March 31, 2019, compared to $6.6 million, or $6.44 per Boe, for the three months ended March 31, 2018. For the three months ended March 31, 2019, G&A included a benefit of $1.1 million related to the forfeiture of 960,890 unvested shares of restricted stock and 691,509 unvested cash-settled performance awards in connection with the departures of certain executives. The decrease in G&A and G&A per Boe was primarily due the forfeiture of unvested restricted shares and unvested cash-settled performance awards and a decrease in salaries and benefits. We expect G&A expense to decrease compared to 2018 due to a decrease in salaries and benefits in connection with the departure of certain executives. The following table summarizes G&A in millions and G&A per Boe.

Restructuring expenses.   During the three months ended March 31, 2019, we recorded restructuring expenses of $6.3 million in connection with the departures of certain executives and in connection with the review of the potential debt restructuring transactions. We expect to continue to recognize restructuring expenses in connection with the continued review of the potential debt restructuring transactions.

Depletion, depreciation and amortization.   Our depletion, depreciation and amortization expense (“DD&A”) decreased $2.1 million, or 13%, to $13.6 million for the three months ended March 31, 2019, compared to $15.7 million for the three months ended March 31, 2018.  Our DD&A per Boe decreased by $0.35, or 2%, to $15.02 per Boe for the three months ended March 31, 2019, compared to $15.37 per Boe for the three months ended March 31, 2018.   The decrease in DD&A over the prior-year period was primarily due to a decrease in production.

Impairment.   During the three months ended March 31, 2019, we initiated a plan to market certain corporate assets for sale. The assets are available for immediate sale and are being actively marketed. The corporate assets held for sale were recorded at their estimated fair value less costs to sell as of March 31, 2019.  As a result, we recognized an impairment loss of $0.3 million for the

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difference between the asset ’ s carrying value and the estimated fair value less costs to sell during the three months ended March 31, 2019.   

Interest expense, net.  Our interest expense, net, increased $0.9 million, or 15%, to $6.8 million for the three months ended March 31, 2019, compared to $5.9 million for the three months ended March 31, 2018.  This increase was primarily due to an increase in outstanding borrowings and floating interest rates under our revolving credit facility. The weighted average interest rate applicable to borrowings under our revolving credit facility for the three months ended March 31, 2019, was 6.5% compared to 5.5% for the three months ended March 31, 2018.

Income taxes. For the three months ended March 31, 2019, our income tax benefit was $4.3 million, compared to $1.6 million for the three months ended March 31, 2018. The following table reconciles our income tax benefit for the three months ended March 31, 2019, and 2018, to the U.S. federal statutory rates of 21% (dollars in thousands).

Liquidity and Capital Resources

We generally will rely on cash generated from operations, to the extent available, borrowings under our revolving credit facility and, to the extent that credit and capital market conditions will allow, future equity and debt offerings to satisfy our liquidity needs. Due to our non-compliance with certain financial covenants under our revolving credit facility, our current sources of liquidity include only cash generated from operations and our cash balance of $15.7 million as of March 31, 2019. See Note 5 to our consolidated financial statements in this report for additional information regarding the financial covenants under our revolving credit facility. Our failure to comply with financial covenants under the revolving credit facility represents an event of default. In the case of an event of default the lenders (i) are not required to lend any additional amounts to us, (ii) could elect to declare all outstanding borrowings, together with accrued and unpaid interest and fees, to be due and payable, (iii) could require us to apply all of our available cash to repay these borrowings and (iv) could prevent us from making debt service payments under our other agreements. We have reached an agreement with our credit facility lenders to forgo enforcement of remedies for an event of default caused by our failure to comply with certain financial covenants in the credit facility for a period of 45 days. This agreement will terminate on June 22, 2019, unless earlier terminated due to additional events of default under our credit facility, or a default under the agreement. In addition, we are in continuing discussions with the lenders regarding a potential extension of and amendments to the existing credit agreement. See Item 5. “Other Information – Entry into a Material Definitive Agreement” for additional information regarding the terms of the agreement. These factors raise substantial doubt about our ability to continue as a going concern. See Note 1 to our consolidated financial statements in this report for additional information regarding our plans to improve our leverage and liquidity.

Our cash flow from operations is driven by commodity prices, production volumes and the effect of commodity derivatives. Cash flows from operations are primarily used to fund exploration and development of our oil and gas properties. In addition, our revolving credit facility is subject to scheduled redeterminations of its borrowing base semi-annually, based on our reserves. Continued low commodity prices may adversely impact the results of the upcoming redetermination, and have a significant negative impact on the Company’s liquidity.

Our ability to fund planned capital expenditures and to make acquisitions depends upon commodity prices, our future operating performance, availability of borrowings under our revolving credit facility, and more broadly, on the availability of equity and debt financing, which is affected by prevailing economic conditions in our industry and financial, business and other factors, some of which are beyond our control. We cannot predict whether additional liquidity from equity or debt financings beyond our revolving credit facility will be available on acceptable terms, or at all, in the foreseeable future.

We believe we have adequate liquidity from cash generated from operations and our cash on hand for current working capital needs and maintenance of our current development plan, absent the lenders under our revolving credit facility taking the actions described above due to our non-compliance with the financial covenants under the revolving credit facility. However, we may determine to use various financing sources, including the issuance of common stock, preferred stock, debt, convertible securities and other securities for future development of reserves, acquisitions, additional working capital or other liquidity needs, if such financing is available on acceptable terms. We cannot guarantee that such financing will be available on acceptable terms or at all. Using some of these financing sources may require approval from the lenders under our revolving credit facility.

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Liquidity

We have historically defined liquidity as funds available under our revolving credit facility and cash and cash equivalents. However, due to our non-compliance with financial covenants under our revolving credit facility, our current liquidity is limited to our available cash of $15.7 million as of March 31, 2019. See Note 5 to our consolidated financial statements in this report for additional information regarding the financial covenants under our revolving credit facility, and the remedies our lenders may exercise during an event of default. As of March 31, 2019, we had $322 million in outstanding borrowings under our revolving credit facility and liquidity of $15.7 million. As of December 31, 2018, we had $301.5 million in outstanding borrowings under our revolving credit facility and liquidity of $23.2 million.

Working Capital

We had a working capital deficit of $318.7 million and $4.8 million at March 31, 2019, and December 31, 2018, respectively. The change in working capital was primarily due to the classification of the outstanding borrowings under our revolving credit facility as current as of March 31, 2019. Additionally, our working capital deficit increased due to (i) application of ASC 842, Leases , of $6.6 million and (ii) restructuring liabilities of $5.8 million. This was partially offset by an increase in cash and cash equivalents of $15.7 million.

Operating Activities

Cash used in operating activities decreased by $6.6 million, to $1.2 million during the three months ended March 31, 2019, compared to cash provided by operating activities of $5.4 million in the prior-year period. The decrease in our cash provided by operating activities was primarily due to a decrease in revenue ($9.6 million), partially offset by decreases in LOE ($0.4 million) and G&A ($2.8 million).

Investing Activities

Cash used in investing activities decreased by $3.6 million for the three months ended March 31, 2019, to $1.8 million, compared to the prior-year period. Cash used in investing activities for the three months ended March 31, 2019, was primarily related to infrastructure projects and equipment ($0.4 million) and changes in working capital associated with investing activities ($1.5 million). At March 31, 2019, we had seven horizontal Wolfcamp wells waiting on completion.

Financing Activities

Cash provided by financing activities increased by $18.7 million for the three months ended March 31, 2019, compared to the prior-year period. During the three months ended March 31, 2019, net cash provided by financing activities included net borrowings under our revolving credit facility of $20.5 million, tax withholdings related to restricted stock of $0.2 million and changes in working capital associated with financing activities of $1.6 million.

Revolving Credit Facility

At March 31, 2019, the borrowing base and aggregate lender commitments under our revolving credit facility were $325 million, with maximum commitments from the lenders of $1 billion and a maturity date of May 7, 2020.  We had outstanding borrowings of $322 million and $301.5 million under our revolving credit facility at March 31, 2019, and December 31, 2018, respectively.  The weighted average interest rate applicable to borrowings under our revolving credit facility for the three months ended March 31, 2019, was 6.5%. The borrowing base is redetermined semi-annually based upon a number of factors, including

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commodity prices and reserve levels. We or the lenders can each request one additio nal borrowing base redetermination each calendar year.

As of March 31, 2019, we were not in compliance with the interest coverage ratio and the total leverage ratio covenants under the Credit Facility, which represents an event of default. See Note 5 to our consolidated financial statements in this report for additional information regarding the financial covenants under our revolving credit facility. As a result, we have presented the outstanding balance under the revolving credit facility as a current liability as of March 31, 2019. In the case of an event of default, the lenders (i) are not required to lend any additional amounts to us, (ii) could elect to declare all outstanding borrowings, together with accrued and unpaid interest and fees to be payable, (iii) could require us to apply all of our available cash to repay these borrowings and (iv) could prevent us from making debt service payments under our other agreements. We have reached an agreement with our credit facility lenders to forgo enforcement of remedies for an event of default caused by our failure to comply with certain financial covenants in the credit facility for a period of 45 days. This agreement will terminate on June 22, 2019, unless earlier terminated due to additional events of default under our credit facility, or a default under the agreement. See Item 5. “Other Information – Entry into a Material Definitive Agreement” for additional information regarding the terms of the agreement. In addition, we are in continuing discussions with the lenders regarding a potential extension of and amendments to the existing credit agreement. There can be no assurance that these discussions will result in the consummation of any extension or amendment in a timely matter, if at all.

Senior Notes

At March 31, 2019, and December 31, 2018, $85.2 million of our 7% Senior Notes were outstanding. See Note 5 to our consolidated financial statements in this report for additional information regarding the Senior Notes. An event of default under our revolving credit facility does not result in an event of default under our Senior Notes.

Wilks, a related party, purchased a portion of our outstanding Senior Notes in the open market. The Company believes that Wilks held approximately $60 million of our outstanding Senior Notes as of March 31, 2019. The Senior Notes held by Wilks are included in Senior Notes, net on our consolidated balance sheets. Our interest expense includes interest attributable to any Senior Notes held by Wilks on our consolidated statements of operations. As we previously disclosed, we are currently engaged in discussions with Wilks regarding, among other things, a debt for equity exchange involving the Senior Notes. There can be no assurance that these discussions will result in the consummation of any transaction in a timely manner, if at all.

Contractual Obligations

Our contractual obligations include long-term debt, operating lease obligations, asset retirement obligations and employment agreements with our executive officers. Since December 31, 2018, other than the restructuring expenses disclosed in Note 2 to our consolidated financial statements in this report, there have been no other material changes to our contractual obligations.

Off-Balance Sheet Arrangements

From time to time, we enter into off-balance sheet arrangements and transactions that can give rise to off-balance sheet obligations. As of March 31, 2019, the off-balance sheet arrangements and transactions that we have entered into include undrawn letters of credit and short-term operating lease agreements. We do not believe that these arrangements have, or are reasonably likely to have, a current or future material effect on our financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources.

General Trends and Outlook

Our financial results depend upon many factors, particularly the price of oil, NGLs and gas. Commodity prices are affected by changes in market demand, which is impacted by factors outside of our control, including domestic and foreign supply of oil, NGLs and gas, overall domestic and global economic conditions, commodity processing, gathering and transportation availability and the availability of refining capacity, price and availability of alternative fuels, price and quantity of foreign imports, domestic and foreign governmental regulations, political conditions in or affecting other oil and gas producing countries, weather and technological advances affecting oil, NGLs and gas consumption.  As a result, we cannot accurately predict future oil, NGLs and gas prices, and therefore, we cannot determine what effect increases or decreases will have on our capital program, production volumes and future revenues.   If the current oil or natural gas prices  and differentials do not improve from current levels, they   could   have a material adverse effect on our business, financial condition   and   results of operations and quantities of oil, natural gas and NGLs   reserves that may be economically produced and liquidity that may be accessed through our borrowing base under our revolving credit facility and through capital markets.

While we face the challenge of financing exploration, development and future acquisitions, we believe that we have adequate liquidity for current, near-term working capital needs from cash generated from operations and our cash balance of $15.7 million,

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absent actions available to the lenders under our revolving credit facility due to our non-compliance with f inancial covenants under our revolving credit facility . In addition, we may determine to use various financing sources, including the issuance of common stock, preferred stock, debt, convertible securities and other securities for future development of reserves, acquisitions , additional working capital or other liquidity needs, if such financing is available on acceptable terms.  We cannot guarantee that such financing will be available on acceptable terms or at all.  Using some of these financing sources may require approval from the lenders under our revolving credit facility.

In addition to production volumes and commodity prices, finding and developing sufficient amounts of oil and gas reserves at economical costs are critical to our long-term success. Future finding and development costs are subject to changes in the industry, including the costs of acquiring, drilling and completing our projects.  We focus our efforts on increasing oil and gas reserves and production while controlling costs at a level that is appropriate for long-term operations. As commodity prices improve, service costs in our industry may also increase. Our future cash flow from operations will depend on our ability to manage our overall cost structure.

Like all oil and gas production companies, we face the challenge of natural production declines. Oil and gas production from a given well naturally decreases over time. Additionally, our wells have a rapid initial production decline. We attempt to overcome this natural decline by drilling to develop and identify additional reserves, farm-ins or other joint drilling ventures, and by acquisitions. However, during times of severe price declines, we may from time to time reduce current capital expenditures and curtail drilling operations in order to preserve liquidity.  A material reduction in capital expenditures and drilling activities could materially reduce our production volumes and revenues.

We believe the outlook for our business is dependent on the potential deleveraging transactions discussed above and the current negotiations with the lenders under our revolving credit facility.